Long-Term Care and Insurance Considerations

Long-Term Care and Insurance Considerations

Clients often seek the advice of an elder law attorney regarding the best protection for their assets in the event they need long-term care in a nursing home or assisted living facility. Since Medicare does not pay for long-term custodial care, having enough to pay for several months to several years of care in a facility is a serious concern for many seniors.

If you have minimal assets, you may qualify for Wisconsin’s Medicaid program to pay for care. But what if your assets exceed the limits for Medicaid qualification? Should you purchase long-term care insurance, or a combination of life insurance and long-term care insurance (called “hybrid” policies)? Factors to consider when choosing between the two include your current health status, available financial resources and your risk tolerance.

With traditional long-term care insurance, you will pay a monthly (or sometimes annual) premium. If you end up needing long-term care, the policy pays out a daily or monthly benefit, up to a lifetime maximum. If you never need long-term care, you end up with no return on the premiums you have paid. While this is the nature of many types of insurance (auto, home, term life), some find the “use-it-or-lose-it” strategy difficult to swallow.

As an alternative, some individuals will purchase so-called hybrid policies. These are policies that combine long-term care insurance with permanent life insurance policies that include a savings/investment component that builds over time. If you end up needing long-term care, you withdraw funds from the policy as they are needed, and the insurance company continues to pay for your care when those funds run out. If you never need long-term care, the funds are still available during your lifetime, and if you die without having expended the funds, your heirs receive the funds upon your death.

Typically, it is easier to qualify for hybrid type coverage because traditional long-term care insurance has stricter underwriting requirements and, therefore, the status of your health will be a consideration in which type of product to invest. Affordability may also be a factor. Hybrid policies are paid over a much shorter period of time, so you will not be able to stretch payments out as long as you would with traditional long-term care insurance, which means you will need to consider available resources. Individuals with more substantial resources may wish to look at alternative investments.

You should also inquire as to whether the payments you will be making are tax deductible. Payments for some hybrid products may not be deductible. Finally, be sure to consult with your attorney, accountant, and financial advisor as to the legal, financial, and tax consequences of your purchase before you make your final decision.

 

Special Needs Estate Planning

Special Needs Estate Planning

Special needs planning involves parents or caregivers who are interested in ensuring quality of life, advocacy and services to a child or individual with special needs. The planning itself is two-fold: First, parents and caregivers will want to be sure that they can use their own assets to provide resources and services and to ensure that such resources are appropriately handled after death. Second, for individuals with special needs, inheritances, like other resources, can have an adverse impact on needs-based or financially-based public benefits. Therefore, special needs planning also incorporates planning for those types of benefits as well.

A properly drafted special needs plan has two primary goals: (1) preservation of resources and (2) ensuring quality of life. The foundation of such planning includes a Will or Revocable Trust, a Special Needs Trust, and in some cases, Guardianship.

If you do not have a Will, Wisconsin Statutes will determine the beneficiaries who receive your property (the Laws of Intestacy). If you have a child with special needs who is receiving public benefits, you may not want that child to receive your property directly. Instead, you can set up a Special Needs Trust in your Will for your child with special needs ensuring that public benefits will remain intact after your death. If you have been court appointed as legal guardian for your adult child, you can also nominate a successor guardian in your Will.

As an alternative to your Will, you can execute a Revocable Trust, which is a trust that provides for distribution of your assets upon death. Unlike a Will, if the Revocable Trust is properly funded, it will allow you to avoid probate procedures. You can also provide for the distribution of assets to a Special Needs Trust within your Revocable Trust.

A Special Needs Trust is a trust arrangement whereby income and assets are preserved and used for the beneficiary without interfering with or jeopardizing the beneficiary’s eligibility for Medicaid, SSI, and other needs-based government benefits. Assets are held and managed by a Trustee, who distributes the assets in accordance with the instructions in the Trust document.

A Special Needs Trust created under a Will or Revocable Trust is called a third-party trust. A third-party trust is one created and funded with assets owned by someone other than the beneficiary. A third-party trust can also be created and funded prior to death and is called a living trust, or inter vivos trust. Under 42 USC 1396p (d)(4)(A), third-party trusts are not subject to a Medicaid lien.

All Special Needs Trusts provide that funds held in the trust are not to be placed under the control of the beneficiary, and most provide specifically that disbursements from the trust are not to be made to the beneficiary but are to be in the form of payments to vendors. The Special Needs Trust must also be irrevocable. The trust also provides what is to be done with any funds remaining after the death of the beneficiary. Unlike Special Needs Trusts established with a disabled individual’s assets (self-settled trusts), a third-party trust contains no requirement to pay back benefits paid to the beneficiary during his or her lifetime. It is important not to commingle the assets of a third-party trust with a self-settled trust because of this distinction.

Special Needs Trusts involve complex estate planning concepts. It is important that you work with someone who is familiar with different types of Special Needs Trusts, the various options for establishing such trusts, and public benefits planning to ensure that your assets are properly managed and that your loved one maintains necessary benefits following your death.

Beneficiary Designations

Clients often ask questions about the use of beneficiary designations in their estate planning. Beneficiary designations can be a convenient way to avoid probate in some situations. If an individual is named as a direct beneficiary on an asset, that asset passes automatically to that individual, regardless of the terms of the decedent’s Will, Trust, or other estate planning documents.

Your attorney will often recommend that you coordinate your Payable-on-Death (POD) beneficiary designations or Transfer-on-Death (TOD) beneficiary designations to follow the distribution patterns in your overall estate plan for the purpose of avoiding probate. Despite the convenience, however, there are several good reasons to consider alternatives to direct beneficiary designations.

1. When you name direct beneficiaries using TOD and POD beneficiary designations to transfer all of your assets directly to those named beneficiaries, there is no one in charge of settling your estate. Furthermore, naming direct beneficiaries means there is no funding mechanism so that the person in charge can pay for funeral and burial, medical bills, debts, and administration expenses.

2. If you have relied on TOD and POD beneficiary designations to transfer all of your assets on death, there is no legal method for handling the disposition of tangible personal property, such as household furniture and furnishings, personal effects of sentimental value, motor vehicles, RVs, and watercraft.

3. While using TOD and POD beneficiary designations avoids the need to have an executor or personal representative appointed, this means that there is no one with the legal authority to file final income tax returns for the decedent. A trustee of a revocable trust has this authority, and so does the executor or personal representative named in a Will. The personal representative named in a Will has no legal authority unless there is a probate proceeding which admits the Will to probate.

In addition to the potential complications above, there are unique complications with respect to Transfer on Death (TOD) deeds for the purpose of transferring real estate without probate.

1. A TOD deed designating multiple children will effectively transfer title of the real estate directly to those children without probate proceedings. While the ease of transfer is convenient, none of the children have a greater say in the maintenance and disposition of the real estate. This can leave children in an untenable situation if they disagree about the disposition of the property, such as whether to sell the property or whether to make improvements to the property to prepare it for sale; not to mention the expenses in maintaining the property in the interim. The TOD transfer of title would even make it legal for one of the children to move into the residence and live there, while refusing to sell the residence.

2. A TOD beneficiary designation often does not cover contingencies. What happens if the named beneficiary predeceases the owner? We might expect that a parent will change their TOD beneficiary designations if a child predeceases them; however, what if the parent is mentally incapacitated, or simply does not take care of it? There is no simple procedure for determining who the successor beneficiaries are for purposes of providing clear title to the real estate. In the event a predeceased beneficiary’s minor children become the successor beneficiaries, real estate cannot be transferred to them without cumbersome court proceedings, such as a guardianship. Going forward, the court would be involved in all transactions involving the real estate, including sale. Furthermore, there is no ability to hold assets for the minor beneficiaries once they become the age of 18.

3. If a TOD beneficiary is in a nursing home and receiving Medical Assistance (Medicaid) benefits, the automatic transfer of real estate to them will affect their Medicaid eligibility and, in all likelihood, cause a loss of benefits. Their proceeds from the sale of the property will likely have to be used to pay nursing home expenses.

Consideration of whether or not to use direct beneficiary designations is crucial to your estate plan. While it may work well in some situations, it is important to consider both the advantages and disadvantages and work closely with your estate planning attorney to avoid common pitfalls. When in doubt, seek proper legal advice before completing direct beneficiary forms to make sure your designations are consistent with your overall estate planning goals.

Transferring the Residence to a Caregiver Child-Exception to Divestment

Transferring the Residence to a Caregiver Child-Exception to Divestment

I’m often asked whether transferring a parent’s residence to an adult child or children will “save the house from the nursing home.” Parents have heard that their friends or other relatives have made such a transfer in order to protect the residence, or to avoid having to sell it to pay for expensive nursing home care. While such a transfer may be appropriate in some cases, many families do not realize that if the parent applies for Medical Assistance benefits within five years of making such a transfer, they will actually be ineligible for benefits for a period of time due to making a disqualifying divestment.

A divestment is the disposing of assets for less than fair market value. If an applicant for Medical Assistance has divested assets, a disqualification period results based on the value of the assets transferred. The penalty period is calculated by dividing the total divested amount by the statewide average nursing home cost of care (currently $252.95 per day) in effect at the time of the Medical Assistance application. This number is the number of days of disqualification.

There is an exception under the divestment rules, however, for transfers of a home to a caregiver child. This exception allows adult children to care for their parent at home as opposed to moving them into a nursing home or assisted living facility, while at the same time compensating the child for their caregiving in the form of a transfer of the parent’s home. The home would otherwise have to be sold and the proceeds used to pay for long-term care.

In order to qualify for the caregiver child exception, the caregiver child must live in the home with his or her parent for at least two years immediately preceding the parent’s admission to a nursing home or assisted living facility. The level of care that the child provides must be the type of care that would ordinarily have required living in assisted living or a nursing home, but for the care provided by the child. Such care may include monitoring medications, providing meals, providing assistance with activities of daily living, such as bathing, dressing, and using the bathroom, and ensuring the health and safety of the parent.

Documentation of the level of care must be provided in the form of a notarized statement indicating that the parent was able to remain in his or her home because of the care provided by the child. The statement must be either from the parent’s physician or from an individual (other than the caregiver child) who has personal knowledge of his or her living circumstances.

It is important to consult with an elder law attorney before making a transfer of the residence to discuss the tax and other ramifications, as well as to ensure that the requirements to meet the caregiver child exception are properly followed.

Family Caregiver Contracts

Family Planning for Long-Term Care

When an ill or older relative needs help with daily activities and personal care, selecting an at-home caregiver can be a worrisome task. Who will provide care? How will they be compensated? What if the older relative needs not just occasional, but full-time care? To alleviate these concerns, a growing number of adult children are becoming caregivers for aging parents.

Although many adult children or grandchildren feel a strong sense of duty to provide care for their loved one, being a caregiver can be extremely time consuming. Providing care to an aging parent may make it difficult for the caregiver to meet other commitments, and may even result in sacrificing employment in order to provide the necessary care.

While many individuals are willing to voluntarily care for a loved one without any promise of compensation, a growing number of families are entering into Caregiver Contracts. A Caregiver Contract is a formal agreement among family members to compensate a person providing care.

A Caregiver Contract has several advantages. In addition to providing financial resources to the family member doing the work, particularly where the caregiver has given up other employment, it assures other family members that caregiving is fairly compensated and describes the care and personal services that are expected in return for a specific amount of compensation. This can alleviate family concerns over who will provide care and how much money will change hands, as well as avoid potential misunderstandings over the loved one’s reduction in assets (and the amount of money that would otherwise be inherited upon death).

Such contracts are also a key part of Medicaid planning, helping to spend down savings so that the recipient of care might more easily be able to qualify for Medicaid benefits. More importantly, without a Caregiver Contract, payments made to a family member for providing care will be considered a “divestment” for Medicaid eligibility, resulting in an ineligibility period. While payments to unrelated third parties for caregiving and personal services are not divestments, caregiving provided by a relative is considered gratuitous absent a contract that meets certain requirements.

Under the Medicaid rules, all payments to relatives for care and services made within five years of an application for Medicaid will be considered a divestment, unless all of the following are true:

•  The services directly benefited the individual applying for benefits.

•  The payment did not exceed reasonable compensation (prevailing local market rate) for the services provided.

•  If the total payment made to the family member is greater than ten percent (10%) of Medicaid’s Community Spouse Resource Allowance, the institutionalized person must have a written, notarized agreement with the relative. (This threshold will range from $5,000 – $11,922).

•  The agreement must specify the services and the amount to be paid and exist prior to the time any services are provided.

In addition to the requirements under the Medicaid rules, a properly drafted Caregiver Contract should contain provisions regarding the type of care, location of the care, terms and frequency of compensation, length of the agreement, income tax reporting issues and provisions for modification or termination. Contracts, even with family members, are legal documents. It is important to get your attorney’s help in drafting the contract to avoid omitting important terms, to provide proper documentation, and to seek advice about qualifying for Medicaid in the future.

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